The average American can be good at making money, but terrible at managing it. Our collective personal finance IQ is extremely low, which is largely a result of our unwillingness to delay gratification.
If youâ€™re tired of being reckless with your money, youâ€™re ready to make a change. The following personal finance tips are incredibly simple and will help you gain control of your money so youâ€™ll be on your way to a brighter tomorrow.
Table of Contents
These finance tips help you gain control of your money:
1. Develop a Budget
Itâ€™s nearly impossible to practice smart personal finance without a documented budget that you revisit on at least a monthly basis. Not only do you need to know how much money youâ€™re making and spending, but you also need a clear idea of where your money is going.
The first time you put together a budget, you might be shocked by how much youâ€™re spending in certainÂ categories. For example, most people are alarmed by their food budget … particularly if they eat outÂ multiple times a week.
Drawing up a budget gives you the chance to see your money goes and then change it, rather than having your dwindling bank account dictate your decisions and behaviors.
2. Pay in Cash
The danger of spending with plastic is that you donâ€™t necessarily know how much you have in your account. Youâ€™re also less apt to feel the sting.
For these reasons, youâ€™re better off paying in cash. One strategy is to use an envelope system that works in conjunction with your budget.
At the beginning of each month, create envelopes for each spending category, such as groceries, dining out, shopping, etc. Place the budgeted amount of cash in the envelope and then take it with you when you go out.
This empowers you with the knowledge of exactly how much you have at any given time. It also keeps you disciplined. When the moneyâ€™s gone, you donâ€™t have anything left to spend.
3. Pay Off Your House Early
By paying off your house early, you can save tens of thousands of dollars and free up money to save, give, or spend. It sounds crazy, but you donâ€™t have to be a wealthy person to do this.
One strategy is to make an extra mortgage payment each year. This can accelerate your timeline by four or five years. An even better move is to put your annual tax refund into the house.
The average tax refund is $3,050. “While it’s tempting to use this money to pay for a vacation, buy a newÂ TV, or upgrade your vehicle, consider throwing it at the house,” Green Residential suggests. “Doing thisÂ over a 10-year period will equal more than $30,000 in premium payments.”
4. Start Saving for Retirement Today
Retirement tends to be something we only start paying attention to in our 50s when itâ€™s just a few years away. But itâ€™s an essential step you should think about when youâ€™re in your 20s, 30s, and 40s. Using the power of compounding interest, even a middle-class American may build a nest egg of millions.
5. Avoid Car Debt
But I donâ€™t have room in my budget to save for retirement, you may protest. Well, if you have a car payment, youâ€™d be mistaken.
The average car payment on a new vehicle is more than $500 per month and takes five years to pay off. IfÂ you purchased a modest car in cash and invested that $500 per month, you could retire in 30 years withÂ more than $1 million in the bank.
So the next time you see a shiny $35,000 convertible on the car lot, imagine youâ€™re choosing between a car that will be worth $15,000 in five years or a million-dollar retirement. Isnâ€™t that an easy decision?
Live Within Your Means
Being smart with money is all about living within your means. If you make $50,000 per year, stop living a $100,000 lifestyle. If you have a net worth of $250,000, stop trying to live like a millionaire.
Itâ€™s that simple: Spend less than you make, save the difference, and make choices for which your future self will be incredibly grateful.